Micro-Foundations of Digital Innovation Capability: A Comprehensive Approach Understanding Digital Innovation

INTRODUCTION

Digital innovation isn’t just about adopting the latest technology—it’s about creating value by integrating digital advancements into every facet of your business. For established, product-centric organizations, this shift poses significant challenges. Traditional innovation management often lacks the reconfiguration and transformation required for successful digital innovation (Kroh, J. et al. (2024).

The gaps are addressed by taking a dynamic capability approach, synthesizing existing literature on the organizational precursors of digital innovation, and developing a robust framework for the micro-foundations of digital innovation capability (Kroh, J. et al. (2024).

The findings reveal that an organization’s digital innovation capability hinges on seven key micro-foundations (Kroh, J., et al. (2024):

i. Digital Focus: Prioritizing digital initiatives that align with strategic goals.

ii. Digital Innovation Process: Establishing structured processes for digital innovation.

iii. Digital Mindset: Cultivating a culture that embraces digital change.

iv. Digital Innovation Network: Building robust networks for collaborative innovation.

v. Digital Technology Capability: Leveraging advanced digital technologies effectively.

vi. Data Management: Implementing sophisticated data management practices.

vii. Overcoming Digital Innovation Resistance: Addressing and mitigating resistance to digital transformation.

These micro-foundations enable established organizations to effectively sense, seize, and reconfigure opportunities for digital innovation, ensuring they remain competitive in a rapidly evolving business landscape.

CAPTURING AND EXPLOITING GREAT IDEAS
Digital innovation means turning great ideas into valuable realities using technology. It includes creating or adopting new products, services, processes, or business models through digital means (Hund et al., 2021:6). Emerging technologies like artificial intelligence, cloud computing, mobile devices, social media, and business analytics are changing how organizations create value (Lanzolla et al., 2020).

These technologies transform everyday operations, innovation processes (Füller et al., 2022; Rauch et al., 2020), and how workplaces are organized (Marsh et al., 2022). Digital tools are accessible, flexible, and scalable, helping organizations build new connections with customers and suppliers (Lokuge et al., 2019).

2.1 TURNING IDEAS INTO REALITY
Digital innovation is about transforming ideas into valuable realities using digital technology. It encompasses the creation or adoption of new products, services, processes, or business models through digital means (Hund et al., 2021:6). Unique combinations of emerging base-level technologies such as artificial intelligence, cloud computing, mobile devices, social media, and business analytics are revolutionizing how organizations generate value (Lanzolla et al., 2020).

These technologies reshape routine operations, innovation processes (Füller et al., 2022; Rauch et al., 2020), and workplace organization (Marsh et al., 2022). The accessibility, flexibility, and scalability of digital tools enable new connections with customers and suppliers (Lokuge et al., 2019).

2.1.1 Digitalization: Merging Digital and Physical Components
When organizations innovate digitally, they often integrate digital and physical elements. This process, known as digitalization, converts analog information into digital formats, making products programmable, addressable, and communicable (Yoo, 2010).

Digital innovations allow firms to create layered product architectures, offering platform-based services (Hilbolling et al., 2020). This integration opens the market to new competitors, altering the competitive landscape (Autio et al., 2018).
Traditional organizations, particularly those in mechanical engineering focused on physical products, may find their business models disrupted by digital innovations (de Massis et al., 2018; Williams et al., 2022).

2.2 THE COMPLEXITY OF DIGITAL INNOVATION
The layered nature of digital technology increases the complexity of innovation (Tuomi, 2002). Digital innovation requires contributions from diverse stakeholders within and outside the organization (Nambisan et al., 2019).

This necessitates cross-functional collaboration across departments and disciplines, involving partners like specialized vendors, suppliers, and customers in an open ecosystem (Abrell et al., 2016; Füller et al., 2022; Yoo et al., 2010).

These innovations often involve different and sometimes temporary partners (Lyytinen et al., 2016; Yoo et al., 2012), adding complexity and uncertainty regarding partners, competitors, and customers (Wirtz et al., 2022). Traditional innovation management practices might fall short; digital innovation requires specific capabilities to succeed (Appio et al., 2021; Dąbrowska et al., 2022).

3 ADAPTING AND THRIVING WITH DYNAMIC CAPABILITIES
The dynamic capability view explains how organizations can adapt and thrive in a rapidly changing business environment, maintaining their competitive advantage. This approach is particularly relevant for established product-centric organizations transforming into digital businesses. It proposes three organizational-level capabilities that enable this dynamic adaptation.

3.1 SENSING, SEIZING, AND RECONFIGURING: THE CORE OF DIGITAL INNOVATION
Organizations need to be vigilant for new opportunities and threats, known as sensing. It involves constantly scanning the external environment to spot emerging trends. Once opportunities are identified, seizing involves capitalizing on them through innovation, creativity, or strategic alliances.

Reconfiguring means restructuring the organization’s operations and resources to maximize these new opportunities (Teece et al., 1997). The success of these actions largely depends on how well managers employ these dynamic capabilities (Eisenhardt and Martin, 2000).

When we discuss digital innovation capability, we view it as a dynamic capability. This concept extends beyond improving existing products and processes under stable conditions.

Dynamic capabilities involve creating, extending, and modifying an organization’s knowledge and resource base to adapt to changes and reshape the competitive landscape (Helfat et al., 2007). This reconfiguration ability is crucial for established organizations transitioning to digital businesses.

3.2 MICRO-FOUNDATIONS: BUILDING BLOCKS OF DYNAMIC CAPABILITIES
Micro-foundations are the building blocks of dynamic capabilities. They encompass the skills, procedures, mechanisms, structures, and resources facilitating sensing, seizing, and reconfiguring.

These micro-foundations are deeply embedded in the cognitive and behavioral processes of individuals within the organization, including learning, problem-solving, and decision-making. They also involve the organization’s social and cultural aspects, such as norms and values shaping interactions between individuals and teams.

Additionally, organizational structures and systems supporting learning and adaptation are part of these micro-foundations (Teece, 2007).

3.3 IDENTIFYING MICRO-FOUNDATIONS OF DIGITAL INNOVATION CAPABILITY
The leadership team will identify the micro-foundations that enable established organizations to sense, seize, and reconfigure, leveraging new digital technologies.

3.4 DIGITAL READINESS
Digital readiness highlights organizational factors supporting digital transformation. This includes empowering employees, having appropriate structures, digitally experienced managers, a willingness to embrace digital trends, and removing barriers like a lack of innovation culture or technology skills, budgetary or legal restrictions, and leadership buy-in (Gfrerer et al., 2021).

3.5 DIGITALISATION CAPABILITIES
Digitalization capabilities are higher-order dynamic capabilities with underlying capabilities like formal routines optimizing digital resources. Managing digital ecosystem partnerships and supply chain integration helps the organization sense new opportunities, foster digital processes, use IT resources, and integrate them with non-IT resources (Annarelli et al., 2021).

3.6 ORGANISATIONAL-LEVEL DIGITAL TRANSFORMATION
Organizational-level digital transformation requires changes in four main areas:

• Corporate Strategy: Adjusting due to significant changes caused by digital technologies on internal processes, product offerings, value chain partners, and competitive landscape.

• Organizational Design: Facilitating orchestration, collaboration, and coordination of internal and external partners to manage digital innovation complexity.

• Digital Capabilities: Using new technologies for faster information processing and better data-based decision-making.

• Value Creation: Adapting to new ways of creating value and managing multiple ecosystem partners (Dąbrowska et al., 2022).

Dynamic Problem-Solution Pairing
Dynamic problem-solution pairing, socio-cognitive sensemaking, technology affordability and constraints, and orchestration are new “logics” for digitalization, challenging traditional innovation management assumptions (Nambisan et al., 2017).

AI-Based Innovation Management
AI-based innovation management requires skilled employees, adaptive organizational structures, and an ambitious innovation strategy (Füller et al., 2022).

Strategic Digital Innovation Orientation
Strategic digital innovation orientation includes technology scope, capabilities, ecosystem coordination, and architecture configuration (Kindermann et al., 2020).

Digital Innovation Readiness
Digital innovation readiness looks at resources, climate for IT integration, motivation for innovation, partnerships with experts, and clear strategic goals for digital innovations (Lokuge et al., 2019).

Balancing New Digital Capabilities
Balancing new digital capabilities with existing product innovation, continuous improvement, engaging external partners, and flexible governance structures are essential for digital transformation (Svahn et al., 2017a, 2017b).

4 SYNTHESISING FRAMEWORKS THROUGH A DYNAMIC CAPABILITY LENS
We synthesize these frameworks into five factors enabling an established organization to sense, seize, and transform through a dynamic capability lens:

i. Digital Focus: Clear digital innovation goals and a formal strategy guide employees in innovation-related decisions and activities. This includes defining the technological scope, roles and responsibilities, and necessary infrastructure and resources (Lokuge et al., 2019; Schallmo et al., 2022; Chen et al., 2017; Füller et al., 2022).

ii. Digital Innovation Process: Mechanisms that support agile and flexible development processes are crucial. Organizational agility, adaptability, and ambidexterity are key for quick responses to environmental changes and are relevant for digital innovation and performance (Del Giudice et al., 2021; Troise et al., 2022).

4.1 THE ROLE OF AGILITY, DIGITAL MINDSET, AND NETWORKS IN DIGITAL INNOVATION
Agility involves swiftly integrating new digital innovation opportunities into the innovation process. It entails constant exploration through improvisation (Annarelli et al., 2021) and rapid, iterative experimentation and development cycles (Nambisan et al., 2017; Peña Häufler et al., 2021).

A flexible digital innovation process supports this ongoing search and exploration, providing a robust foundation for sensing and seizing opportunities.

4.2 DIGITAL MINDSET
A digital mindset means recognizing that merely having resources and practices for digital innovation isn’t sufficient. It’s about fostering a shared understanding among employees and managers regarding the potential of digital technologies. This understanding aids in recognizing and responding to emerging trends (Huber et al., 2020; Nambisan et al., 2017).

When employees possess profound and widely shared digital knowledge, their confidence in digital technologies increases, boosting their digital innovativeness (Mancha and Shankaranarayanan, 2020). Moreover, an entrepreneurial climate is crucial for motivating and empowering employees to proactively explore new digital opportunities (Lokuge et al., 2019; Dąbrowska et al., 2022). Thus, a digital mindset is a vital foundation for seizing digital opportunities.

4.3 DIGITAL TECHNOLOGY ADOPTION AND DATA MANAGEMENT
Digital innovation requires the right physical resources, such as IT infrastructure and digital platforms (Sedera et al., 2016; Yoo et al., 2012), and the ability to use them effectively. This includes IT-enabled routines and the capacity to collect, analyze, and interpret data from various sources (Huber et al., 2020).

Clear responsibilities and coordination mechanisms are essential for managing data access and interpretation, ultimately supporting data-driven decision-making (Dąbrowska et al., 2022). IT infrastructure will also be adaptable to technological changes (Chen et al., 2017), and the organization needs to recognize the value of new digital technologies and data sources.

Thus, digital technology adoption and data management are crucial foundations for:

i. Sensing new opportunities through data-driven insights,

ii. Seizing opportunities by enhancing decision-making,

iii. Transforming by leveraging new business models through new data sources and continuously renewing the digital technology base.

5 DIGITAL INNOVATION NETWORK
Organizations will engage in digital innovation and collaborate with various partners, including IT vendors, consultants, suppliers, complementors, and customers (Abrell et al., 2016). This involves mechanisms to decide which technology should be developed internally and which should come from external partners if internal knowledge is insufficient (Hanelt et al., 2021; Kindermann et al., 2020).

Organizations need to open up their innovation processes and facilitate collaboration with external partners. Unlike traditional customer-supplier relationships, digital innovation partnerships are often temporary, non-exclusive, and not controlled by a single organization (Lyytinen et al., 2016). Digital platforms, for example, bring together diverse actors who innovate and create value collaboratively (Yoo et al., 2012).

To manage these partnerships effectively, organizations will cultivate governance structures that support collaborative innovation, knowledge sharing, and joint value creation (Kindermann et al., 2020). This ability to establish and manage a network of partners is a critical foundation for:

i. Sensing new opportunities by learning about new digital technological and business possibilities from outside the organization,

ii. Seizing these opportunities through collaboration with external partners,

iii. Transforming the organization’s structures, processes, and resources by organizing them within ecosystems.
This conceptualization of the micro-foundations of digital innovation capability serves as the starting point for further scale development.

6 IDENTIFYING KEY MICRO-FOUNDATIONS
(Kroh, J. et al. (2024) identified six essential building blocks, or micro-foundations, that drive the digital innovation capabilities of established organizations.

6.1 DIGITAL FOCUS
Digital focus is about how an organization evaluates the impact of digital innovation on its business model (Foss and Saebi, 2017). Interviews highlighted that organizations don’t just see digital innovation as vital within their current business models but also look for opportunities beyond their core industry (Kroh, J. et al. (2024).

Integrating digital innovation into the organization’s goals and strategies, including financial, human resources, and strategic technology planning, is essential. This also clearly defines roles and responsibilities for capturing digital opportunities (Kroh, J. et al. (2024).

6.2 DIGITAL INNOVATION PROCESS
The digital innovation process constantly experiments with new digital opportunities. This process should be flexible and agile. Recent research shows incumbent organizations will balance flexibility and control in their innovation processes (Svahn et al., 2017a). The need for rapid development and protection of digital innovations comes from recognizing the highly competitive pressure, as new market players could seize emerging digital opportunities (Kroh, J. et al. (2024).

6.3 DIGITAL MINDSET
A digital mindset is essential for understanding digital technologies and their potential in daily work and business. Advanced digital technologies, like AI and big data, require new employee skills and can diminish the value of existing competencies (Huang and Rust, 2018).

The need for creativity and flexibility in digital innovation contrasts with the rigid routines and beliefs of long-standing employees (König et al., 2021). It is crucial to change to a digital mindset where employees trust their abilities and feel empowered to innovate.

6.4 DIGITAL TECHNOLOGY ADOPTION AND DATA MANAGEMENT
Digital technology adoption and data management are foundational for digital innovation. Organizations need the right technology and data management capabilities to innovate (Yoo et al., 2012). This includes having the necessary infrastructure and the ability to gather, analyze, and use data effectively.

6.5 DIGITAL INNOVATION NETWORK
Building a digital innovation network involves collaborating within and beyond traditional supply chains and industry boundaries. Organizations will operate in a diverse ecosystem to succeed in digital innovation (Selander et al., 2010). Identifying relevant partners and creating new models for sharing components, information, value, and liability is critical

6.6 OVERCOMING DIGITAL INNOVATION RESISTANCE
Digital innovation’s complexity often meets resistance at different levels within an organization’s ecosystem. Constructive opposition can generate innovative ideas (Adomako et al., 2019; Markham, 2000).

Engaging with skeptical employees, customers, and suppliers builds trust and enhances the acceptance of digital innovations. Overcoming resistance is essential, as it can stem from a lack of knowledge, job insecurity, legal barriers, internal bureaucracy, and fear of customer rejection. This aligns with past research showing numerous barriers to digital innovation (Gfrerer et al., 2021).

6.7 SIX MICRO-FOUNDATIONS
Here are the constructs and initial items for the six micro-foundations identified for the digital innovation capabilities of established organizations (Kroh J. et al. (2024):

6.7.1 Digital Focus

• We have recognized the importance of digital innovation for our organization.

• We have very ambitious digitization goals.

• We have formulated and communicated a digital strategy as a guide to develop digital innovation.

• We have defined roles, responsibilities, and decision-making processes for implementing the digital strategy.

• Management acts as a role model for digital innovation.

• We provide extensive financial resources to implement our digital strategy.

• We build new capabilities to implement our digital strategy.

• We hire new employees to implement our digital strategy.

• We refine our technical infrastructure to implement our digital strategy.

• We modify our processes to implement our digital strategy.

6.7.2 Digital Innovation Process

• We consider digital innovation possibilities resulting from combining hardware and software in our innovation process.

• We consider the ongoing potential of digital innovations, for example, because of software updates, in our innovation process.

• We consider new business opportunities beyond the primary intended use (e.g., extended data use) of digital innovations in our innovation process.

• We know external and unknown market partners may benefit from our digital innovations.

• We take precautions to protect our digital innovations against competitors.

• We use agile methods and tools (e.g., SCRUM, digital mock-ups) to develop digital innovations.

6.7.3 Digital Mindset

• In our organization, digital innovation is established (e.g., information campaigns and events).

• Our employees understand the possible impact of digital innovation on their daily work.

• Our employees ask for the implementation of digital innovations.

• Our employees discuss the impact of digital innovation on the organization in teams.

• A high number of our employees are digital natives.

6.7.4 Digital Innovation Network

• We depend more on external partners to develop digital innovation than on other kinds of innovation.

• We collaborate with new external partners in the development of digital innovation.

• Relationships with external partners have more of a partnership than a customer-supplier character.

• No organization in our digital innovation network (neither ourselves nor an external partner) controls the innovation process.

6.7.5 Digital Technology and Data Management

• We can identify valuable data (e.g., machine, user).

• We can identify critical digital technologies (e.g., cloud solutions, machine learning, etc.).

• We have the appropriate technical systems to store, evaluate, and analyze valuable data.

• We can generate and merge data from different sources.

• We can gain knowledge from this data.

• We are responsible for all operational data storage, evaluation, and analysis activities.

• We coordinate all operational activities relating to data storage, evaluation, and analysis across functional and departmental boundaries.

• We consider the impact of all operational decisions on data storage, evaluation, and analysis.

6.7.6 Overcoming Digital Innovation Resistance

• Our employees do not have the competences to develop digital innovations.

• Our employees are not willing to develop digital innovations.

• Our employees perceive legal conditions (e.g., data protection laws) as barriers to developing digital innovation.

• Our employees think missing customer and supplier acceptance hinders developing digital innovation.

• Our internal processes and high bureaucracy levels are barriers to developing digital innovation.

7 SUPER METRICS FOR HIGH-IMPACT ACCOUNTABILITY AND LEADERSHIP TEAM PERFORMANCE
The introduction of super metrics for the leadership team is essential to drive high performance and ensure accountability at the top level.

These metrics will measure critical aspects of leadership team performance, specifically focusing on preventing accountability delegation to middle managers.

The high-performance results below are indicative. Organizations can achieve a more transparent, efficient, and results-driven leadership culture by linking these super metrics to the performance review process.

7.1 THE IMPORTANCE OF SUPER METRICS
Super metrics are indispensable for:

• Driving High Performance: They focus on the key areas that significantly impact the organization’s success.

• Ensuring Accountability: They prevent the dilution of responsibility by keeping the leadership team directly accountable.

• Enhancing Transparency: They provide clear, measurable criteria for evaluating the leadership team’s effectiveness.

• Supporting Strategic Goals: They align with the organisation’s strategic objectives, ensuring that the leadership team’s

actions contribute to overall success.

7.1.1 Six Super Metrics for Leadership Team Performance

i. Digital Focus Alignment
o Measure: Percentage of strategic initiatives that align with digital transformation goals.
o High-Performance Indicator: 90% or more initiatives align with digital transformation goals.
o Rationale: Ensures the leadership team prioritizes digital initiatives that drive the organization forward.

ii. Innovation Process Efficiency
o Measure: Time taken from ideation to implementation for digital innovation projects.
o High-Performance Indicator: Less than 6 months from ideation to implementation.
o Rationale: Measures the agility and effectiveness of the innovation process, ensuring rapid adaptation to market changes.

iii. Digital Mindset Adoption
o Measure: Employee engagement and feedback scores related to digital initiatives.
o High-Performance Indicator: 85% positive feedback from employees.
o Rationale: Indicates the extent to which a digital mindset has been adopted across the organization, reflecting the leadership team’s success in cultural transformation.

iv. Collaborative Innovation Network
o Measure: Number of successful partnerships and collaborations with external digital innovation partners.
o High-Performance Indicator: At least 10 new partnerships per year.
o Rationale: Ensures the organization leverages external expertise and resources to drive innovation.

v. Advanced Technology Utilization
o Measure: Percentage of projects utilizing advanced digital technologies (e.g., AI, cloud computing).
o High-Performance Indicator: 80% of projects.
o Rationale: Reflects the organization’s capability to effectively leverage cutting-edge technologies for innovation.

vi. Leadership Team Accountability
o Measure: Direct accountability measures (e.g., the number of strategic decisions made and executed by the leadership team without delegation).
o High-Performance Indicator: 95% of critical strategic decisions.
o Rationale: Ensures that the leadership team retains direct accountability, preventing the transfer of responsibility to middle management.

vii. Linking Metrics to Performance Reviews
It is crucial to integrate the metrics into the performance review process to maximize the impact of the super metrics:

• Regular Evaluation: Conduct quarterly reviews of each metric to ensure continuous alignment with organizational goals.

• Performance-Based Rewards: Link bonuses and other incentives to achieve each metric’s performance indicators.

• Transparent Reporting: Provide regular updates and reports to stakeholders to maintain transparency and build trust in the leadership team.

• Continuous Improvement: Use the insights gained from these metrics to identify areas for improvement and implement targeted development programs for the leadership team.

By adopting these super metrics, organizations can foster a high-performance culture at the leadership team level, ensuring accountability, driving innovation, and achieving sustained success in the digital century.

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